LeanCVC? - A Match Made In Heaven
Why Corporate Venture Capital & Private Equity Should Head For The Altar
Recently, I was approached by a mid-market Private Equity (PE) firm in the midst of its Strategic Review. Particularly, they looked for advice on how PEs can significantly reduce the acquisition costs and how I could help to bring new and completely untapped investment opportunities to them. And new opportunities also mean new and untapped revenue streams - a matter of great importance to PEs preparing a profitable exit in 5 years.
When requests of such nature materialize, I usually follow the prescribed path. In most cases, I ask myself a question: If I simply replaced “PE” in the above context with “XXX” - who else would fit the bill? The short answer: Corporate Venture Capital (CVC)!
For years, I advocated a simple thesis: CVC should stop imitating VCs! No, you can’t just dab a little bit into a Venture Capital the same way you can’t be just a little bit pregnant! Only a few of my corporate clients understood such a notion prior to our encounter - most didn’t!
Private Equity
According to McKinsey , the global value of PE deals has reached $1.4 trillion in 2018, and $778 billion of new capital flowed-in. As a result, the overall levels of “dry powder” have reached $2.1 trillion. In the U.S. alone - 4,828 deals worth a combined $713 billion closed. And that’s a lot of money - any way you look at it.
In comparison, the VC industry reported a total of $254 billion invested globally into ~18,000 startups. And while Venture Capital often invests in unproven business models, Private Equity benefits from established traction, respectable earnings, and experienced management teams at its portfolio companies.
Moreover, while VCs often bring AI capabilities to the untried business model - PEs can immediately demonstrate Artificial Intelligence’s value pertaining to EBITDA Growth, Revenue Acceleration, and Margin Enhancement.
So, why are PEs leaving SO MUCH MONEY on the table, allowing Venture Capital to run circles around them?
The answer is quite simple. I worked with many PE-backed companies in the past and some have done very well by analyzing their customers with granular details. Logically, they are selling their products and services to existing customers they thoroughly scrutinized.
And yet, I firmly believe that there are HUGE and untapped opportunities to generate new revenues by focusing on …. noncustomers! So, it became painfully clear to me over the years that:
VC-backed startups often embrace outside advice and are truly open to opportunistic pivots. PEs - not so much!
Since on average, less than 10% of companies in any PE portfolio are big winners - outside “wisdom” can make a huge difference. Experienced, hard-working management teams - are never at ease at admitting a defeat. When well-funded scale-up executions fail and PE’s visions turn into hallucinations – the dreams of wealth are quickly becoming the nightmares of poverty. I learned it the “hard way” and carry many scars on my back to prove that:
Business Model innovation is 10X more disruptive than technology innovation
IMHO, it’s the exponential increase in value offered to clients at a much lower cost – that makes all the difference. From my personal experience, I frequently demonstrate how product-oriented entities are usually losing ~70% of POSSIBLE revenue streams. In addition to the Push-Only approach, I focus on generating huge secondary and tertiary revenue streams – and call it: The Push, The Pull, and The AI Bull?. Such a strategy is scalable and sustainable - and as a side bonus, it also offers revenue smoothing.
I’m therefore convinced that in many cases, PEs could benefit from good advice and ESCAPE the Red Ocean competitors all together!
Since in 50% of all PE acquisitions a new CEO is recruited - it’s not the founder that is often asked to accelerate scale-ups and expansions. Instead, PEs look for a nimble “Jack of All Trades” and a “War Horse” ...?
A new CEO is quickly preparing his 100-day strategic plan which becomes a reliable KPI to PEs. It validates the choice they’ve made.?And I’m utterly convinced that the executives delivering quality strategic planning within the first 100 days will significantly outperform those who are lacking such abilities …
Without AI, however - I find many companies and PEs to lose a lot of time and money trying to open New Channels, accelerate International Expansion, Pivots, Turnarounds, Brand Enhancements & Innovative Exit Strategies.
And it can be extremely difficult for AI-less entities to generate 20% IRR and 3X Cash-On-Cash returns - in just 5-6 years (an average PE exit period).
High IRRs and Cash-On-Cash constraints are the main reason behind PE’s infatuation with debt. As I clearly demonstrated in my Financial Models linked to the large-scale renewable generation projects: unlevered equity IRR can be 3-4 times lower, than the equity IRR levered by debt. Especially in today’s environment, when even a non-recourse debt is widely available at historically low rates. It's PURE MATH and not some kind of a Machiavellian conspiracy. Please see:
Corporate Venture Capital
According to CB Insights, “CVCs around the world participated in 2,740 global deals worth $53B in funding throughout 2018”. It looks IMPRESSIVE, at least at first glance. Yes, only a few short years ago CVCs took part in about 20% of all VC investments. Today, such figures are hovering around 33%.
But then you quickly realize that most of the CVC deals are done by the top 30+ corporations. And, no, I’m not talking about the proverbial Pareto Principle and 80/20 rule. It’s not the top 20% of CVCs that fall into a category of serious “wheeling & dealing”. It’s a grand total of ~30 players ...?Surprised? Don't be! "Democracy is coming to the USA" - RIP Leonard Cohen and thanks for "The Future" - one of my favorite songs!
I wrote extensively about CVC Pains & Gains in my book: “AI Boogeymen - Dispelling Fake News About Job Losses” and at our?website ,?LinkedIn , or?twitter , including:?
领英推荐
Quite recently, I praised Steve Blank for showing how large corporations and their CVC arms are not to fall into the innovation trap - and how such entities could save hundreds of millions while at it. But it can’t be done without the shift from ... FORM to SUBSTANCE.
Steve says: “In a startup, 100% of the company is focused on innovation and entrepreneurship. In a large corporation, 99% of the company is focused on the execution of the current business model by building repeatable processes and procedures. And a very small percentage are focused on innovation”.
So, given the inherent structural difficulties linked to their ability to innovate - what are the industry giants to do? In a single word: a lot - but not in a form of setting up yet another corporate accelerator/incubator as a point activity. And Steve coins it as the “Innovation Theater”:
“These are innovation activities, not deliverables. The hard part in a company is not getting a demo or setting up an internal accelerator, it’s getting something delivered all the way through your existing sales channel.
“A good number of companies focus on the easy part, which is, “Let’s have an incubator/accelerator.” The hard part is, “How do we deliver something with speed and urgency?”
So, I indicated in my previous posts that if a company overly relies on incubators - the output flow of deliverables from their innovation pipeline will start resembling a mighty Colorado river - in mid-summer. It trickles down through a Horseshoe Bend outside Page, AZ - without much fanfare. And if you never visited Page in the summer months - think about the river flow... as a dribbling stream of a BPH patient with an enlarged prostate.
In addition to a 1% challenge linked to the corporate attention-span deficit toward innovation, Steve Blank also points to another challenge: “In a startup, if you win, it’s a payout of billions of dollars. In a large company, for the individual, there is no such payout”.
This is precisely why, I repeatedly called in my posts on using Corporate Venture Capital (CVC) more intelligently - in order to overcome such hurdles!
Above all, however - CVC’s proverbial difficulty is to convince its corporate parent to allocate hundreds of millions of dollars for investment purposes. After all, any such moves will at some point affect both the top and the bottom line of a corporate balance sheet. There is no free-lunch when innovation budgets are created ...
In addition, by formally co-investing with other VCs, CVCs must also swallow the 2% Annual Management Fee charged by the GPs and stomach the 20% Carry - on all the successful exits. ... So, welcome to the brave new world of a LeanCVC?!
LeanCVC?
Traditionally, CVCs would invest in startups at various growth stages in exchange for a minority position in the company. In contrast, PE firms would often take a majority position in mature companies in traditional industries.
However, this practice is changing as PE firms increasingly look-out for more deals and buy out CVC-backed tech companies. Similarly, CVCs are now open to buy more mature startups - if such companies fit their strategic objectives. If only there was enough money available to CVCs for a pricier acquisition ...
So, here it comes:
Instead of spending hundreds of millions of dollars on acquisitions, CVCs can simply focus on “grooming” the startups for PE’s investment!
Small to mid-size PEs need a $5MM EBITDA and at least $30MM in Revenues prior to making their move. With the right strategic fit, CVC can LITERALLY issue a Purchase Order (PO) to a startup - and satisfy PE’s need! But ... there is more to this than meet the eye.
Many entrepreneurs are being warned to do a proper Due Diligence (DD) on CVCs for a simple reason: if corporate Business Units are fairly detached from the CVCs - incorporating startup’s technology within the established Business Lines of the parent company will be EXTREMELY difficult. In turn, it will be difficult to generate startup’s revenues from selling its products and services to CVC’s parent.
So, the “guarantee” of the $5MM Purchase Order will force the CVC to bring the various Business Units on board and to break the deployment barriers. And when the strategic innovation gets fully adopted - more POs and more revenues are quick to follow.
My LeanCVC? Value Innovation addresses the two basic requirements of the BOS framework: reduce cost and increase value - SIMULTANEOUSLY! In essence:
·??????CVCs could acquire more strategically positioned early-stage AND late-stage companies - with “Other People’s Money” (OPM)
?·??????PE industry could significantly increase its Investment Pools and consider many more acquisitions than ever before. All this, by dealing with a larger number of entrepreneurial companies with a REAL revenue in place - and not just a few flashy Letters of Intent ...?
How else are we going to “democratize” CVC and bring more MSBs into the loop? Even the most ambitious Fiscal Policies by the Federal Government and various Tax Breaks are not going to improve Financial Statements’ top line. Yes, such can help make the bottom line prettier - but there will not be enough money to make a costly acquisition.
I’ve been saying it for years: not a single MSB is included in a Top 30 CVC Club. And celebrating the growth of rich-boys clubs - is like putting lipstick on a pig. It’s still a pig ...?
In Conclusion
What we need is solutions that work and not additional CVC reports - no matter how pretty the summary tables! And perhaps it’s the CAPITALISM 2.0 of the Business Round Table that will leave more cash in the hands of corporations in the future. Spending less on share buybacks will allow businesses to invest more in R&D, innovation, and strategic acquisitions.
On August 19, 2019, 200 of the largest businesses in the US have REDEFINED the purpose of a corporation. No longer corporation’s sole purpose is to cater ONLY to its shareholders. “Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all”.
Say what you want, but it might be a truly TECTONIC shift! It will eliminate the management’s exclusive focus on reaching the ROI figures “by any means necessary”. As a result, we should see a significant decrease in financial fraud, too. A great day for restoring market integrity!
Yet it took 50 years to shift away from Shareholder Primacy defined by Milton Friedman. And until we see some structural changes in place leading Corporate CEOs to embrace long-term thinking - the above declaration may just become empty rhetoric. Until then, LeanCVC? could fit the bill ...?
Oleg Feldgajer is President & CEO of Canada Green ESCO Inc. Oleg is positioning the company to become a leader in financing AI-enhanced green energy projects and ventures. CGE’s mission is to guide DISRUPTIVE businesses in ENERGY & TRANSPORTATION toward profitable business models. Oleg is passionate about such mission and firmly believes that without AI-based innovation, we will all prematurely choke on polluted air and dirty water. CGE delivers 100% financing (levered and unlevered) to its clients - and utilizes large equity pools, and non-recourse debt. Oleg offers creative, fresh ideas to open-minded businesses - that embrace both: logic AND opportunistic intuition. CGE stands against mediocrity & its modus operandi is quite simple:?If CGE is not invited to join your BOD or Advisory Board – we failed!